安捷倫 (A) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second-quarter 2012 Agilent Technologies earnings conference call. My name is Keith and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Keith and welcome everyone to Agilent's second-quarter conference call for fiscal year 2012. With me are Agilent's President and CEO, Bill Sullivan, as well as Senior Vice President and CFO, Didier Hirsch. Joining in the Q&A after Didier's comments will be Agilent's Chief Operating Officer, Ron Nersesian, and the Presidents of our Electronic Measurement, Life Sciences, and Chemical Analysis Groups, Guy Sene, Nick Roelofs, and Mike McMullen.

You can find the press release and information to supplement today's discussion on our website at www.investor. Agilent.com. While there, please click on the link for financial results where you will find revenue breakouts and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

For any non-GAAP financial measures you will find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors.

And now I'd like to turn the call over to Bill.

Thanks, Alicia and hello everyone.

Agilent's Q2 orders were up 8% and Q2 revenues were up 3% over last year. Non-GAAP EPS was $0.78 per share, and operating margin was 19.5%. Our Q2 performance demonstrated our ability to deliver strong results in spite of a challenging economic climate. Here are some of the business highlights. Electronics Measurement revenues were up 5% over last year. EMG's top line strengthened with a book-to-bill of 1.09. Both orders and revenues were the highest since 2001. Operating margin was 23%.

Communications market revenues grew 7% year-over-year, with strong demand for wireless manufacturing tests. General Purpose, which includes industrial, computer, and semiconductor markets, was up 5% with solid macroeconomic trends in Asia, the Americas, and higher contract manufacturing demand. Aerospace and defense grew 1%, reflecting higher US government demand, partially offset by lower Defense Contractor business.

Last quarter we introduced the Infiniium Q-Series oscilloscopes with industry-leading real-time bandwidth of 63 gigahertz on two channels and 33 gigahertz on four channels. These new scopes deliver superior measurement accuracy with the lowest noise and jitter measurement floor in the industry. We also introduced four new X-Series signal generators which provide industry-leading performance at the lowest cost of ownership. Applications include radar, military communications, and consumer wireless.

In our Bio-Analytical Measurement businesses, you'll recall that a year ago we experienced some revenue delays from the Varian integration. This resulted in an easier compare last quarter, but tougher compares for our second quarter of fiscal 2012. Adjusting for the effect of last year's integration issue, our Analytical business grew 5% versus the reported 2%. My comments will reference the reported revenue.

Chemical Analysis revenues were up 2% year-over-year, operating margin for the quarter was 19%. Food and petrochemical remained solid, both up 2%, driven by global demand. Environmental and Forensics were up 1% with strong demand in emerging markets, offset by soft government spending in the United States and Europe.

Our recently introduced GC/MS Q-TOF continues to gain traction with higher incoming order rates and we're starting to see a tick up in orders for the new ICP triple quad. We also entered into a cooperative research and development agreement with the US Food and Drug Administration to develop new tools to detect and analyze pathogens in food. Life Science revenues were up 1% over a year ago. Operating margin was 13%. Our Pharmaceutical business paced head of the market with 4% growth as we continued to see good market penetration acceptance. Academic and Government were down 6% over year-ago, reflecting the softness in government spending.

We introduced Agilent SureFISH probes, the next generation forensic in situ hybridization assays. SureFISH delivers a comprehensive menu of over 400 probes with the industry's leading resolution for a wide range of molecular analysis applications, including cancer research. We also announced a number of extensions of the 1200 Infinity LC product line setting new benchmarks in performance, versatility, and cost of ownership.

Agilent also paid its first quarterly cash dividend at the end of April. The initiation of a quarterly dividend reflects Agilent's financial strength and continued growth opportunities and underscores our commitment to enhance shareholder value and return. Agilent enters the second half of fiscal year well-positioned to navigate continued economic uncertainty. Our backlog has grown by over $100 million. We continue to deliver industry-leading products to the marketplace and our expenses continue to be well-controlled. The key to Agilent's continued success is our ability to react quickly to business opportunities anywhere in the world.

Thank you for being on the call. Now I'll turn it over to Didier.

Thank you Bill and hello everyone. As always, my comments will refer to non-GAAP figures. Agilent's second-quarter results again reflected the soundness of our operating models. Revenues adjusted for the change in exchange rates since last quarter were $14 million above the high end of our guidance, while EPS of $0.78 per share exceeded the high end of the range by $0.05, benefiting from the revenue strength, well-managed operating expenses, and a non-GAAP tax rate reduction to 16% which contributed $0.015.

Starting with Q2 orders and revenues. Orders of $1.84 billion were up 8% from one year ago and up 9% in constant currency. Segment orders adjusted for currency reflected a 13% increase in EMG, CAG grew 8%, and LSG was flat year-on-year. Regional order growth rates in constant currency were 22% growth in the Americas, a 2% decline in Europe, 5% growth in Japan, and a 3% growth in the rest of Asia-Pacific.

Revenues of $1.73 billion increased 3% from one year ago, 4% at constant exchange rates. CAG and LSG revenues grew 3% and 2% respectively at constant currency. Adjusted for last year's Varian revenue delay impact to Q2 fiscal '11, CAG grew 7% and LSG grew 3%. EMG revenues grew 5% on a currency adjusted basis. Regional revenue growth rates in constant currency were 16% growth in the Americas, 5% decline in Europe, 2% decline in Japan, and 1% decline in the rest of Asia-Pacific.

Now moving to the income statement. As I've noted in the past, while currency does have -- does impact each P&L line, it has minimal impact on our operating margin performance as a result of our geographic diversification and systematic hedging program.

Gross margin of 54.1% was down 130 basis points versus last year, due to EMG's 250 basis point reduction resulting from a higher percentage of wireless manufacturing test business. Operating expenses continued to be well controlled, declining 1% year-over-year. Consequently, our Q2 operating margin of 19.5% was up 20 basis points versus the same period last year. Non-GAAP net income of $275 million, or $0.78 per share, compares to $261 million, and $0.74 per share one year ago, an EPS increase of approximately 5% year-over-year.

Turning to the cash flow. The quarterly cash generated from operations was $353 million, down $25 million compared to the same period last year. During the quarter, we paid our first dividend in the amount of $35 million. Our cash position at the end of April was $3.9 billion, mostly offshore.

Now turning to the guidance for fiscal year 2012. As always, our guidance assumes exchange rates as of the last day of the reported quarter. We are projecting a fiscal-year '12 revenue range of $6.94 billion to $7 billion, same $6.97 billion midpoint as in last quarter's guidance. At the midpoint, our guidance corresponds to core growth of 6.7% in the second half and for the full year a core growth of 5.7%.

The second-half core revenue growth is projected to be close to 5% for EMG, and close to 9% for CAG and LSG combined, as we move into easier compare territory. Our fiscal-year '12 EPS guidance is $3.18 to $3.24. We're increasing the midpoint of our prior fiscal-year guidance by $0.03, entirely due to the reduction in our non-GAAP tax rate to 16%. The midpoint of our EPS guidance at $3.21 reflects 9% growth over our fiscal-year '11 EPS of $2.95, which is consistent with the year-over-year operating margin incremental of 33%.

Finally, moving to the guidance for our third quarter. We expect Q3 revenues of $1.77 billion to $1.79 billion, and EPS of $0.82 to $0.84. The core revenue growth at the midpoint will be 6.8%, while the midpoint of our EPS guidance will represent an 8% year-over-year increase.

With that, I'll turn it over to Alicia for the Q&A session.

Thank you Didier. Keith, will you please give the instructions for the Q&A?

Jon Groberg, Macquarie Capital.

So just two from me and congratulations on a good quarter in what seems like it's been a tough operating environment as we listen to others.

Thank you.

If you think about the revenue guidance, just maybe get a little bit more clarity there, because I think you actually came in at a high end of the guidance. Sounds like your book-to-bill is pretty good. You feel better about the comps. But your revenue guidance overall if you take the midpoint as you said, maybe it didn't really move that much, so maybe you could just talk about what you're seeing from an end-market perspective and what's built into that outlook.

Yes, as you already said, Jon, we do enter Q3 with a very strong backlog and we have the easier compares as Didier said in Q3 and Q4. Right now our sales funnels look good in the capital equipment market. These can also turn down quite rapidly if in fact there continues to be economic uncertainty, but as we enter into Q3, the sales funnel around the world looks good and so that's why at this point in time we have confidence in our revenue guidance.

Okay. So just conservatism given everything that you see in the world as opposed to anything right now that's going on with the business?

Well, I think in terms of the business, we have two areas that we highlighted, Europe is struggling, particularly on the Electronic Measurement side, and academic and research on the Life Science side we're down. That was more than offset by the wireless manufacturing. That one of course will continue to be the most volatile. And after right now we continue to play a strong hand on the wireless manufacturing, and again, on adjusted revenue going forward the rest of our core businesses in terms of pharma, food, petrochemical, and general purpose test and measurement look reasonably strong.

Okay. Then if I could follow up on the Life Science. You alluded to I know you said government academic was weak, as you just highlighted pharma was fairly stable, it sounds like. But the one thing in that business, if you look at the margins, the incremental margins, it looked like things improved a little bit in the first quarter of '12 relative to the trend, I took a step back here a little bit again in the second quarter. Can you just talk about -- I think you said comps got easier so I don't know if that's -- if you're thinking more about the pharma side versus the government and academics, maybe how that plays out and what to expect from the margin side of that business, the incremental margins on the Life Science side. Thanks.

Jon, I'm going to have Nick respond to your question regarding the outlook and the margins.

Jon, I'll kind of walk you through from the top. We had the softness in the orders in academic as you pointed to. Frankly, that order softness was sitting heavily in the research products division and also in the genomics division. Genomics we took a pause, research products, we're now on the back end of the stimulus money. We had a tough compare last year. Those orders in research products that we took last year are now shipping. And frankly, the operating margin on some of those orders weren't as good as we had hoped. As you know, that business is in a repair mode so that's where the gross margin movement is. It's a mix equation for the quarter.

But we do forecast in our guidance an improvement in operating margins as per overall commitment for the year with sound incremental for the whole year.

Okay. Thanks. I'll hop back in the queue.

Nandita Koshal, Barclays Capital.

I guess Didier just to continue that thought on the gross margin side, could you talk about just across the three divisions, I see EMG despite revenue upside came in a little bit softer as well. So what sort of P&L mix are you thinking about going forward in terms of SG&A margins, gross margins? You did a little bit better on the SG&A side, could you elaborate on that a little bit?

EMG had very sound incremental this quarter of 34%, and with a pretty high I would say ROIC of 48%, so we are very pleased with EMG's results. This being said, there is as we have always said gross margins are higher in R&D test than they are in manufacturing test in the communications space, and there was pretty significant content of manufacturing wireless, manufacturing test business this quarter which we think will be sustainable for the next quarter. But so we are, again, for the whole year EMG's operating margin incrementals are very, very much in line with our model.

So the gross margin was really just a mix effect and you expect that to swing back to more normal level?

Gross margin, exactly. There's the mix impact which will stay with us at least for the next quarter and potentially gets a little bit better in Q4.

Did the overall incremental guidance for the full year soften a little bit from the 35% to 33% or did I get that -- did I mishear that?

There's always a little bit of noise here, there, for example, if there's a slight currency changes, they impact the top line but don't impact the bottom line, therefore they change the incremental so it's a little bit mechanical thing. But overall we are very much in line with our commitment at this kind of revenue growth, in fact, we are better than our commitment in terms of royalty margin thanks in big part to our strict control of operating expenses.

I see. Just to wrap up, I wanted to ask Bill about the quality of visibility in the business, just broadly, but in EMG specifically, Bill, you had said the signal to noise was rather weak last quarter. Maybe if you could update us on some of those pieces that you'd called out as being weak in Q1, the base stations, RF components, some of the supply chain color. Thank you.

I'll just make a few comments, then turn it over to Guy. As we said last quarter, there was a lot of softness in the base station purchasing, as well as the RF components, and again, at a high level has not gotten a lot better. Wireless manufacturing test for cell phones has gotten a lot better. But Guy can give more details.

Yes, Bill, I will just confirm what you said. We've seen clearly uptick in wireless manufacturing test but what we had said in Q1 is the overall business for base station and the added component manufacturers that supply the base station business have not changed. We'll see this over the next couple of quarters, being the case. In the other businesses, clearly we've had very balanced in fact results across the different market segments as we see both aerospace defense stronger than what we expected and our ICS segment also growing 5%. So we have a very stable and balanced outlook for EMG.

Okay. Thank you, gentlemen.

Paul Knight, CLSA.

Hi, Bill. You had an extraordinary top end line growth on the North American business at 16%, Asia down negative 1%. Can you talk to that spread?

I'm going to have Didier answer that question on how we report revenue by continent versus country.

Yes. So the way we report orders, first, start with orders, is we report orders in the regions where orders are placed. So if an order is placed in the Americas, we report these orders as being in the Americas, and basically that's where the decision maker is and usually where our field engineers are located also. And in order to be consistent on the regional basis, we report revenue exactly the same way as we report orders, so basically in the regions where the order is placed is the same, because we want -- you guys are going to start looking at orders and revenue, so we want to be consistent.

Now, to give you additional information, we track also revenues on a ship-to basis, so where we deliver the instrument or the service. And you can have, as you can imagine, with so much manufacturing taking place in Asia and in China, a big discrepancy between where the order is placed and therefore where we report revenue on the original basis and where we report revenue on the ship-to basis. So we often provide information as to our country growth rates and this is always on the ship-to basis.

So to give you -- and this quarter's obviously a more of an anomaly. Overall reported Asia business is flat. China's revenue, ship-to revenue that was delivered in China is up 12%.

Okay. Thank you.

Dan Brennan, Morgan Stanley.

Congratulations. I thought maybe we could dig in a little bit on the communications business for you. Can you just give us a little bit more color about where the strength is coming from today. Are we seeing much on the 4G side yet, Bill, maybe help us think about the design side and the production side, is that business mostly on the com in '13 and maybe just flush out some details there. Thanks.

Again, we've been very clear on our position that the growth in cell phones, smart cell phones has continued to be dominated by G3, and that's where most of our growth is. You are starting to see the LTE G4 rollout in the United States, but correct me if I'm wrong, Guy, most of the growth is still all 3G-based.

That's correct, Bill. I would say that more and more of our customers look for 4G enabled products. So as we go, it's going to be more and more difficult to make a difference between 3G and 4G. Going forward, people really invest into products that are capable of doing all of it.

Great. And then maybe just one quick follow-up just on Chemical Analysis. I know you gave some color about the trends that you were seeing in the quarter. How do those trends compare to your own internal plans, could you just remind us? Because it looks like this Chemical Analysis business was a little bit weak versus our model, I'm just trying to think about how it did versus your expectations and what we should expect.

As we noted, the actual growth in Chemical Analysis, roughly 7%, but I'll have Mike give some color commentary. And again, I can't stress, our Q1 growth rates in our Analytical business in Q1 were overstated by a lot and because of the anomaly of the Varian integration and again, we're obviously seeing that in the Q2 results.

Thanks, Bill. Maybe a few additional comments on the Chemical Analysis business. As Bill noted, revenues up 7% on this adjusted basis but we have -- as you dig into the Q2 results you really have a lot of reason to be confident about our outlook for the second half. 8% constant currency order growth rate as Didier mentioned. Book-to-bill over 1. The emerging markets strong double-digit growth in the quarter. And in fact, just got back from a week in China and the business is still very solid there with solid growth and our new products are ramping well. So tracking very nicely relative to our expectations and we have a really positive outlook for the second half.

Doug Schenkel, Cowen & Company.

EMG in the Americas drove a decent portion of the revenue upside in the quarter. And I think this is pretty consistent with some of the recent signs in LTE and 4G. But I guess what I'm interested in, was America's EMG a bit better than internal expectations for the quarter? And then I guess on the other side of the world, how did EMG perform in Asia relative to your internal expectations? I think some may have thought that would have rebounded a bit more strongly given the timing of lunar new year.

I think if you look at EMG in its totality and go into the reasons that Didier talked about, how we report orders and how we report revenue, that the quarter met expectations with slight upside due to manufacturing cell phone test. And I think you really have to look at holistically and not just isolate one region versus the other.

Okay. And then I guess for both you, Bill, and Didier, operating margin was certainly a bit better than consensus expectations and this is in spite of gross margin coming up a bit light, largely because of the EMG product mix. Logically one might be able to conclude that you're accelerating cost savings initiatives in the face of economic uncertainty. Is this a fair conclusion?

I'm going to have -- again, Didier make a comment but I'll have Ron talk about what we're doing in terms of our cost savings moving forward. Obviously as Didier said, at the manufacturing test for cell phones the margins tend to be lighter. Ron has a detailed program to build to drive our gross margins up, and as you can see, we are controlling hiring, controlling expenses and ensuring that we're only making the appropriate investment where we think there's business opportunity given the economic uncertainty. But Ron, maybe make a few comments on our continued progress on improving gross margins.

We're on track for making the improvements that we need to make in LSG and CAG in gross margins. We're focusing on three particular areas with our new organization. One is on procurement, making sure that we use the leverage of approximately a $7 billion corporation. Second is on logistics, making sure that we use logistics contracts that also gets this type of leverage of being a large organization as we move products and solutions around the world. And the third is leveraging instrument manufacturing. But all these things are in place, they're on track. Some things that are contracts, the old contracts do not run out for a while so you'll see that continue to add value to the Company along the line of the guidance that we gave last time. And other things that are redesigns will take more time. But we are seeing improvements right on top of and on track of what we had talked about last time.

Okay. And if I could ask one more, and it's a high-level one but I think an important one. Your stock has appreciated I think it's about 11% year-to-date. You've outperformed the S&P but there's been clearly a pullback since the beginning of calendar Q2 relative to the market and shares are still materially below where they were a year ago. Many investors with whom I speak love the Agilent story, they love the cash flow, they think highly of your discipline and they view the valuation as attractive. At the same time, they're growing a bit frustrated with the stock performance and wonder what else can be done to get the stock to work a bit better. How much do you pay attention to stock performance over the past several quarters and I think getting to the crux of this, are you giving any thought to being even more aggressive with M&A or trying to find new vehicles to bring cash back to the US in a way that potentially could benefit shareholders? Thank you.

Again, we have the same frustration as our investors do. My job, reporting the Board of Directors, is to improve the value of Agilent's stock going forward and a large part of my pay and this Executive team's pay is tied to our total shareholder return versus the segments of the S&P 500 that we compete into. I think you alluded to the problem. I had been quite hopeful that there would be common sense and that one would be able to tax effectively bring back in cash back into the United States tax effectively. It appears that is not going to happen any time soon and essentially Agilent has $3.9 billion sitting overseas. Our number-one priority continues to look for acquisitions, particularly in the Analytical, Life Science, and renew, and anything that we can do to increase the percentage of reoccurring business, we continue to look for opportunities to be able to deploy that in an acquisition that we have high confidence that we can return long-term value to our shareholders.

We continue to, again, lobby and hope along with the rest of the companies in Silicon Valley that Congress sees the benefit of bringing in this overseas cash tax effectively and reinvesting it back in the United States. But again, we share your frustration.

But in the absence of any miraculous change in Washington, the plan is to stick with the same discipline when it comes to what you do and the lack of repatriation, meaning no debt to fund buybacks and you stick with the same M&A discipline?

We'll continue to stick with the M&A discipline moving forward. Obviously, our bias is going to be more outside the US than the inside. We are absolutely committed to our investor-grade rating and I think in this period of time given the economic uncertainty to load up the Company in debt for a short-term recapitalization isn't a prudent strategy.

Okay. Thanks again.

Jon Wood, Jefferies.

So Bill, why would EMG only grow 5% in the second half of the year, given the orders? I think $960 million in orders is the highest ever after restructuring some of those businesses, so did you see a one-time effect in the quarter or are you just being conservative on the macro? Because it seems like on the order trajectory, EMG should be much higher than 5% for the back half of the year. So I'd love some color on that.

Yes. Again, there is enormous amount of economic uncertainty out there moving forward. Q1, we were surprised to the negative. Q2, we're a little bit surprised to the positive. So I think that we're taking a very prudent position. You've I'm sure read all the commentary of our competitors in this space and I think that we have a prudent plan, and as a result of that realistic guidance for the second half of the year.

Understood. Can you just talk through the linearity in EMG for the quarter? Meaning February, March, April, was there any trend put in in terms of strengthening, decelerating, or was it very sporadic?

The quarter was I think solid across the board.

How was April in EMG?

The quarter -- EMG's quarter was quite solid across the whole period of time.

Okay. And then just the last one's for Nick. I think you've had some dislocation in your OEM business. Can you quantify that in the quarter? And you were talking about research products, Nick, I'm not sure, is that NMR? Can you give us more color about the weakness you saw in your business, the specific product line there.

Yes, sure. The dislocation in the OEM I think you're referring to was the LC business and we said publicly that's in the percent range and obviously that's out of our baseline going forward. We did have a negative revenue growth in LC but just barely for the quarter. And research products I really was pointing to NMR when I made that comment earlier.

Are you willing to go into a little bit more detail on where that business is in terms of new product vitality? Is it -- have we troughed there? Can you just give us some level of conviction that the appropriate actions have been taken there and how you see that playing out the next several quarters?

Jon, we continue to slog through the forward pace in terms of coming out with new products and fixing cost of goods and doing elements under the covers. We are making progress in that slog, but as I said before, in March and I'll continue to say this year, the results of that progress really don't show up in the next couple of quarters. We continue to slog through, ship product. We'll have some mix issues like we did this quarter in terms of aggregate gross margin for the whole business, because that business is at lower margin and we're pretty optimistic that there is progress.

Okay. Thank you.

Patrick Newton, Stifel Nicolaus.

Congratulations on the solid quarter. First off, for Didier. I wanted to focus on gross margin and I guess given the increased demand for wireless test and the expectation of continued strength, is it fair to say that we should see a depressed gross margin here over the intermediate term? And then what is it going to take to get us back to kind of that 55% to 57% range longer term?

So we do see based on our guidance some improvement from the 54.1% gross margin in Q2 going forward. Obviously, a little bit of revenue growth will help, and as I mentioned, we probably will see the same mix in Q3 versus Q2 and the mix could change more positively into Q4, and then in any case, in the operating margin level, there's continuous improvement planned throughout the year.

All right. Thank you. I guess one for Guy on the EMG side, just to follow up on a prior question on bookings. Seems like with record-level bookings, is it fair to say that it's similar to the strength you saw in the current quarter with coms leading the way, followed by general purpose, and then aerospace and defense lagging. Or has that mix from a bookings perspective shifted at all on a sequential basis?

I would stay with what we said a month ago, is really stay with the long-term growth expectation where aerospace defense where we're going to be flat, ICS more 4% to 6% and com 6% to 8% is what we're looking for over the long term.

So the bookings is matching that level in essence?

Yes, that's what we had in Q2.

Okay, thank you for taking my questions.

Derik De Bruin, Bank of America.

So I just wanted to follow up on something. You said that your LC business was down a little bit. And yet your pharma business was up 4% during the quarter. So where's the strength in pharma coming from? Is it LCMS? Sounds like your NMR was there. Could you elaborate on where the strength is in the pharma business.

Yes. We certainly did pretty well in LCMS, although not grossly different than LC in pharma. We sell a lot of products into that market, so the pharma customers year-over-year was pretty good, I think partially in the compare. I'm not sure if that answers your question, but LC and LCMS were performing not dissimilarly.

Okay. Nick, you talked about some improvements to the 1200 family. Can you talk about that, what you've done in terms of some of the changes there? And I guess once more on sticking with the pharma theme, are you still of the 12 to 18 month extension of the replacement cycle continuing?

Two separate questions. Not to get too deep in product detail but we did launch a new Quaternary pump in the 1200 family. Continue to extend that family out. That product will be shipping to revenue next month. We expect to start seeing some results of that product shipping to revenue and hopefully order momentum builds from that launch. And then I still am personally thinking that that replacement cycle window isn't moving, so therefore I'm still about now 15 months from the point where I get concerned on that replacement cycle.

Great. And then just couple of quick housekeeping questions Didier. What are you looking for FX impact in Q3? And what was the M&A impact on the current quarter?

Sure. Q3 we think FX will be unfavorable to a tune of 1.8%. I mean based on basically our exchange rate as of the end of April as we always do. Q2 was unfavorable by 0.4%, and then Q4 will be 1.6%. And on the other question --

M&A.

On the M&A, we do look at -- we do adjust for inorganic and organic growth, but the amounts are in the zero point something. It's between 0% and 0.2% or 0% and 0.3%, very, very minimum.

Great. Thank you very much.

Tycho Peterson, JPMorgan.

First one for Nick, following up on a question a minute ago on pharma trends. Are you able to talk about the competitive dynamics in mass spect? In other words, are you picking up share? We saw two of your peers put up pretty soft March quarter results. Just wondering what the shared dynamics are. Can you talk on trends in April versus February and March?

Let me see -- I'll partially answer it. I'm not going to answer the share question directly, Tycho, I'm sorry. But in terms of partially answering the question, we really have not seen any pause in terms of the way the pharma guys are spending on mass spect. We've seen good revenue in terms of India, in terms of orders, so we didn't see any currency trapping there that looked like it came out of the pharma sector. In Europe, we continue to see some pretty consistent spend in terms of the mass spect and pharma in general. So we're not seeing any real pause in that marketplace in terms of pharma.

Okay. And then for Didier, are you able to quantify the impact of the lunar new year a year ago?

The impact of?

The lunar new year was this quarter a year ago.

That was -- basically when we looked at CAG, I mean combined CAG and LSG and Bill mentioned that combined Varian had a 4% headwind, while currency had 1% unfavorable and then Chinese New Year was 1% going the opposite direction. So it really at the end of the day it was all Varian that impacted and so currency and Chinese New Year offset each other and was very minimum.

Okay. And then last one, going back to the discussion earlier on incremental margins. I think you said that stat was almost exclusively mix. But is there a price component as well, or are you guys able to hold price in this environment?

I think we continue to do well holding price, but in a slowing market our competitors are quite competitive and so I think that we have to prepare for a very competitive environment. We have tough competitors and as Ron alluded to, we are aggressively ensuring that we continue to have the lowest manufacturing costs in the industry.

Okay. Thank you.

Isaac Ro, Goldman Sachs.

If I could just follow up on Tycho's question, I did want to ask sort of the same issue in a different way. It sounds like if you look back in history you guys have done a great job taking share in LSG in particular, partially with better pricing dynamic given your low cost advantages. So is it fair to say that should pricing be a good more of an issue in the back half, you guys are prepared to stay in that position selectively? And then secondarily, is there a way to quantify the extent to which market share in general helped your business this quarter in LSG and then in EMG?

Again, in general, we don't make references as you know to market share. We just let the numbers speak for themselves. In fact, we do a very good job of comparing ourselves to the -- our top competitors and for just a quarter itself, not adjusted, we're roughly at market. Clearly in the last four quarters, we have done better than that moving forward. But the competition's tough and they know what we do. We know what they do. And so we need to make sure that we don't make any changes to our overall strategy to drive performance coming out of our R&D teams and ensure that we have the best manufacturing team to be able to compete in what is becoming a tougher market.

Thanks very much. Just secondly, China obviously none of us have a crystal ball. Wondering if you could give us a little more color on how the order growth in that region looked across your business segments this quarter.

Normally what we do is we don't give order growth by country but we do provide on demand visibility on the revenue growth by country and in China in fact Bill mentioned it, it was 13% revenue growth and China interestingly -- we're talking by the way mainland China, so it even excludes Hong Kong, but it's 19% -- it was 19% or 19.1% of our revenue this quarter, Q2, so fairly significant. India was flattish year-over-year in this quarter and then we saw continuous huge increase in Brazil and Russia. Again, the results of the great strategy that Ron is responsible for, so we're talking close to 50% growth in those two countries.

Great, if I could sneak in one last one on wireless. I think you mentioned some of the dynamics there regarding the gross margin hit and I'm wondering if as we look longer term how would you weigh the dynamics around pricing versus scale as a source of improving the margins there?

I think that this market is highly competitive and they're deal by deal and we have a very disciplined process in terms of what business we want to take. But there's just a handful of cell phone manufacturers that make the vast majority of the phones and all these deals are pretty well-known. And I think between the operational efficiency that Ron spoke about, the technical expertise they're bringing to market that Guy spoke about, we can compete with anybody.

Fair enough. Thanks a bunch.

(Operator Instructions) Richard Eastman, Robert W Baird.

Just wanted to double back for a second to the local currency revenue growth rates by region and Didier perhaps you could just -- when I look at the growth rate, 16% in the Americas in LC, obviously LC, but Europe and Asia either no growth or down 7%. I'm curious if any of the three businesses, EMG, LSG, or CAG, did they show growth in Europe?

Yes. CAG had growth in Europe and EMG, in terms of order, sorry, on constant currency, and in terms of revenue, both CAG and LSG had growth in Europe even on the nonadjusted for Varian, so the growth is even higher.

The biggest impact in Europe was in EMG.

Okay. So that was down big. And so order growth in Europe and also in Asia in both LSG and CAG, was order growth a positive number?

Yes. And by the way, also for EMG in Asia.

Okay. So orders were positive.

Yes. On a currency adjusted basis, absolutely.

Also, can you Didier in the second half of the year in '12, fiscal '12, you've commented core growth would be I guess 6.7%. And when you look at the three businesses, business groups, EMG, are you suggesting that now is in the second half will be more like a 5% or 6% number?

Yes, on the core growth -- so core growth excludes both acquisitions which we know are very, very small and also the impact of currency and I've already noted that currency had a negative impact of 1.6% in Q3. In Q4, sorry. So the nominal growth will be less than the core growth. The nominal growth that we're expecting is more like close to 4% for EMG and close to 7% for CAG and LSG combined. And the number I was referring to was adjusted for currency which again adds overall 1.6% to Agilent overall.

Okay. So again, that's unchanged, that's pretty much unchanged excluding the currency number?

On currency adjusted basis, everything, it's totally unchanged.

Okay. Thank you.

And ladies and gentlemen, we have no other questions at this time. So I'll turn it back over to Management for the call.

Okay, Keith. Thank you very much. And on behalf of all of the Agilent Management team, I'd like to thank everybody for joining us and have a good day. Good-bye.

Ladies and gentlemen, that will conclude today's conference. Thank you for joining us and you may now disconnect. Everyone have a great day.